Quality issues push e-cigarette production to U.S. from China

(Reuters) - Some of the leading U.S. producers of electronic
cigarettes are moving their manufacturing to the United States
from China in response to growing concern about quality and the
prospect of tighter federal regulations.

In recent weeks, some of the best-selling U.S. e-cigarette
companies, including closely held Mistic and White Cloud,
announced that they would move production to new, highly
automated U.S. factories that would enable them to track
ingredients and quality more closely. As a fringe benefit, they
even expect costs to be lower than in China, the country that
invented the battery-powered cartridges that produce a
nicotine-laced inhalable vapor.

"People are concerned about quality," said Bonnie Herzog, a
senior analyst at Wells Fargo Securities, who expects more
manufacturing to shift to the United States.

"There is varying quality among all these different brands,"
she said. "I think regulation will standardize these products
because they will be forced to improve."

The shift has gained momentum since April, when the U.S.
Food and Drug Administration proposed rules that would require,
among other things, manufacturers that want access to the U.S.
market to register with the agency and list the ingredients in
their products.

"As a general rule, the FDA regulation will require more
control over the manufacturing process," said Bryan Haynes, an
attorney at Troutman Sanders, a law firm in Richmond, Virginia,
that represents e-cigarette companies. He said more companies
plan to move production to the United States because it "could
make compliance easier".

Many of these companies already produce the nicotine-laced
liquid used in e-cigarettes in the United States and then ship
it to China, where the battery-powered devices are assembled.
Most batteries will continue to be made in China.

E-cigarettes are considered a crucial business for the
three major U.S. tobacco companies, which have bought or
developed their own brands in recent years to offset shrinking
sales of conventional tobacco cigarettes. Compliance with new
U.S. regulations has become a top priority.

U.S. sales of e-cigarettes are expected to outpace sales of
tobacco cigarettes by 2020, in part because of the perception
they are safer to smoke.

Their advocates say e-cigarettes are a safer alternative to
smoking traditional cigarettes since they do not produce
lung-destroying tar. But there is little data about the
long-term health effects of the products.

Reynolds American Inc is the only one of the nation's three
largest tobacco companies to make its e-cigarettes in the United
States, at a factory in Kansas. It currently sells its Vuse
brand in two states but expects to expand nationwide this
summer.

Lorillard Inc's blu brand is assembled in China but the
liquid is produced in the United States. Reuters reported
earlier this week that Reynolds was in active discussions to buy
Lorillard. Blu is the top selling e-cigarette brand in the
country, with about half of the market share.

Altria Group Inc makes the liquid for its MarkTen in
Richmond, Virginia, and manufactures the brand in China. It also
expects to sell the e-cigarettes across the United States this
summer.

To be sure, most e-cigarettes are still made in China. Many
companies are pleased with production in China and have no plans
to move their operations. NJOY, for example, produces the liquid
for its NJOY brand in the United States and assembles the
devices in China.

"We adhere to our own 'gold standard,' which covers quality
control practices and tests of every NJOY product," Craig Weiss,
the company's chief executive, said in an email.

In May, Tarpon Springs, Florida-based White Cloud said it
would move manufacturing to an automated plant in the United
States that would make production much faster and more precise.

"We can delivery a much more uniform product because we're
not reliant on someone's eye," said Rob Burton, director of
corporate and regulatory affairs at White Cloud Electronic
Cigarettes. The company, like many other manufacturers, has been
hand-filling the liquid into the devices in its Chinese
facility.

Burton said White Cloud would like U.S. regulators
eventually to approve the product as a medical device for
smoking cessation. The new design, he said, should provide
"consistent vapor delivery."

John Wiesehan, Mistic's chief executive, said his company
was moving production even though it was satisfied with the
quality of the products made in China. He conceded, however,
that there was a perception of inferior quality with
Chinese-made products. "I wanted to remove that stigma," he
said.

Mistic officials expect to cut costs by moving production
to the United States because the company won't have to ship the
fluid and could reduce the number of workers it employs.

"You're in the beginning stages of this industry," Wiesehan
said. "And we're developing standards as we speak."

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